Bonds: Still in favour
?? ??òμ?? By Amy Low??The inter-bank market - where banks bor-row from or lend to each other- is flushed with money at the moment, due to aflood of for-eign funds and the continued fall in interest rates.??This means that banks here have more mo-ney than they needand are motivated to lend out such "idle money". Hence, the low housing loan rates, for example. This contrasts with thesituation at the height of the Asian economic crisis when there was a liquidity crunch, and interbank rates, which arethe rates at which banks borrow from or lend to each other, hit as high as 12%.??Also, interest rates have fallen significantly over the last few months, a phenomenon that would stimulate economic growth as lower borrowing costs and savings rates will en-courage businesses to invest and households to consume.??In such a low interest-rate environment, it may still be good for investors to consider in-vesting some money in bonds because they will be able to achieve a higher return than cash deposits.??For example, in Singapore, current short-term fixed deposit rates are now about 1%, compared with 3% for a 5-year Singapore government bond and 3.6% for a 5-year HDB bond.??In other words, relative to short-term de-posit rates, onecan pick up 2% more by hold-ing the bond for 5 years.??Interest rates aside, the retail investor should pay heed to a more fundamental principle a-bout investing in bonds: it does not matter whether interest rates are high or low-bonds play an essential part in a person's investment portfolio.??Investors may find this statement hard to swallow, given the current stock market rally.??No doubt, the Singapore stockmarket has risen by about 55%over the last six months and is the best performing asset class now; yet, it is important to note that the stockmarkethad also fallen substantially by about 37% in the first 9 months of 1998 alone.??Therefore, investors should be mindful of the volatility of the stockmarket.??Bonds, measured by the UOB Government Bond Index, are lessvolatile although the probability of earning higher returns than equities is lower.??Cash deposits, measured by the three-month Singapore Inter-Bank Offer Rate, are the least volatile but this is offset by the fact that returns are the lowest.??In a nutshell, an investor should consider investing in bonds as an alternative asset class for the purpose of diversification and in consi-deration of his overall investment objectives.??These objectives include whether there is a greater need for capital gains or regular in-come. Other considerations such as liquidity needs and time horizon also determine an in-vestor's appetite to assume risks and, accord-ingly, his choice of asset class to invest in.??As a b